Elite Chinese Politics and Political Economy

My name is Victor Shih, currently an assistant professor of political science at Northwestern University specializing in Chinese politics. This blog shares my musing and discussions on Chinese politics and political economy with interested readers. You can contact me at vshih AT northwestern.edu, and my website, where I post my recent research is: http://faculty.wcas.northwestern.edu/~vsh853/

Monday, December 31, 2007

Well, the CIC decided to end the year with an announcement of a 20 billion USD injection into the China Development Bank via Huijin. This has been in the works for months, although it is 10 billion shy of what the CDB had asked for. Well, the world is not perfect, but this will significantly bolster CDB's capital adequacy and allow it to continue to make loans. The CDB does not have a NPL problem, but it has been expanding lending like crazy, thus needs to boost its capital adequacy via an injection. BTW, loyal readers, PLEASE BUY MY BOOK! It's now totally out and available. You will learn quite a bit about Chinese banking and elite politics, I promise.

Tuesday, December 25, 2007

Well, rumors of a one-off revaluation keep coming, despite having been shown wrong repeatedly. Look, the pace of revaluation will be faster next year, but can you imagine the Chinese government raising prices on Chinese exporters by 10% over-night? It is simply not going to happen. There is only one caveat. If inflation rises above 10% and nothing else seems to work to stem inflation, the central government may do this out of desperation. For now, however, there is yet little limit to increasing reserve requirements and in issuing sterilization bonds. It's a hassle for the PBOC, and that's why we keep hearing "rumors" from them.

South China Morning PostRegulators seek 'one-off' yuan appreciationAl Guo in BeijingUpdated on Dec 25, 2007Mainland monetary regulators have reportedly asked the State Council for a "one-off" appreciation of the yuan, a move that could signal a tough new policy to reduce rising global trade tensions and fight excessive liquidity.

The plan, reported in a state-owned newspaper yesterday, would mean an abrupt policy change by officials who have long argued for a gradual gain of the yuan against the US dollar and other currencies.

But with China facing growing demands from its key trading partners for a strong yuan, Beijing is under increasing pressure to widen the currency's trading band and for one-off steps to accelerate revaluation.

Although the yuan has risen by more than 10 per cent since Beijing's decision in July 2005 to scrap its peg to the US dollar, there has been no visible impact on the mainland's surging trade surplus.

The Shenzhen-based Securities Times quoted an unidentified person with "the authorities" as saying that the People's Bank of China had submitted a proposal to allow a faster appreciation of the yuan next year.

The proposal had been worked out by high-ranking officials from the central bank, the State Administration of Foreign Exchange and the Ministry of Commerce.

The yuan was trading at 7.3556 yuan to the dollar yesterday, a gain of 10.26 per cent since July 2005. It has surged more than 6 per cent this year.

Officials from the PBOC and SAFE contacted yesterday said they had not heard of the proposal and declined to make further comment.

"Faster appreciation is likely given growing inflation and liquidity problems domestically and increasing external pressures from the US and Europe," said Yiping Huang, the managing director and head of Asia-Pacific economics at Citigroup.

He expects a 7.5 per cent appreciation of the yuan against the dollar next year, with growing consensus among policymakers to more effectively use the exchange rate to fight overheating risks.

Gao Zhanjun, an executive manager at Citic Securities, said a big change in the yuan would be out of character for Beijing as it had repeatedly emphasised a gradual pace of appreciation. "The problem is how fast is fast enough," he said. "A slow pace at least offers administrators the room to make adjustments according to market changes."

"A one-off appreciation is unlikely," said Alan Luk Ting-lung, a treasurer at American Express Bank.

The central bank, battered by excessive liquidity, believes a stronger yuan could help ease money supply and curb inflation. The Ministry of Commerce fears a stronger yuan would dent the country's exports.

Tsinghua University professor Zhang Taowei said the administration did not have the courage to abandon its policy of gradual appreciation. "It's all about governing styles," he said. "If former premier Zhu Rongji was still in charge, I think a change was possible. But this administration has been living with compromises."

Thursday, December 20, 2007

Again, another great story, but I do urge people to get the real story behind the scene. This is the type of story usually scooped up by Caijing, but since it involves a Western investment bank, I am hoping that a Western outlet will get the story, would be an interesting one.

Great Wall Street of China

Morgan Deal UnderlinesThe New Capital Flow;Who's Playing Whom?

By RICK CAREW in Beijing, LAURA SANTINI in Hong Kong and JAMES T. AREDDY in ShanghaiDecember 20, 2007

Beijing's plan to invest $5 billion in Morgan Stanley caps a milestone year for China's deal makers: For the first time, Chinese companies and the government bought more overseas than foreign buyers have invested in China.

Chinese buyers have spent $29.2 billion acquiring foreign companies so far this year, while investors from the rest of the world have bought $21.5 billion of Chinese companies, according to Thomson Financial.

The investment in Morgan Stanley will give state-run China Investment Corp. -- a sovereign-wealth fund, essentially the government's money pile -- as much as 9.9% of the Wall Street giant.

It is the latest in a string of bailouts of financial giants by foreign investors as the firms struggle with souring mortgage-related investments. Indeed, yesterday Morgan Stanley reported a $9.4 billion write-down for its fiscal fourth quarter on its U.S. subprime and other mortgage investments.

The question now is, are these investors the smart or the dumb money? Historically, foreigners are the suckers who allow the locals to sell out at the market's peak.

Already, the Abu Dhabi Investment Authority, which invested $7.5 billion in Citigroup, told executives at the bank that it wasn't pleased by Citigroup's move to bring $49 billion in assets onto its balance sheet, people familiar with the matter said. The investor also expressed concern that Citigroup might have to raise more capital, potentially diluting its investment.

[chart]A person aware of the matter said Citigroup's relationship with Abu Dhabi remains good and that Abu Dhabi officials didn't disagree with the bank's actions.

And there has been a political backlash in China against the government fund's $3 billion investment in Blackstone Group LP's initial public offering, a high-water mark for the private-equity boom. Since then, Blackstone shares have lost more than a fifth of their value, erasing $633 million in the paper value of China's investment.

Consequently, CIC's senior managers emphasized they were looking to take a slower, more passive approach. Only last week, CIC started the selection process for money managers to funnel some of the $67 billion they have allocated from the $200 billion fund for overseas investment into global equity markets.

But then, the fund seized opportunity to make the Morgan Stanley investment, an aggressive move at a time when Wall Street banks look more like distressed assets.

"This deal is a big surprise," said Stephen Green, a senior economist at Standard Chartered in Shanghai. "The U.S. subprime crisis created an opportunity, and they jumped at it." For CIC, the deal with Morgan Stanley, its second-largest overseas investment, could provide access to expertise the giant fund is keen to acquire.

Following widespread domestic criticism over the Blackstone loss, CIC characterizes itself as a "passive investor" and will have no representation on Morgan's board. That is likely meant to address concerns over political sensitivities surrounding China's investment in a blue-chip Wall Street firm.

Two years ago, strong political opposition in Congress derailed a bid by Chinese oil company Cnooc Ltd. for Unocal Corp., of California. Since then, Chinese firms have shied away from efforts to buy majority stakes in big U.S. companies.

Still, the sheer size of China's investment in Morgan Stanley will likely give it clout.

Days before Charles Prince decided to step down as Citigroup CEO amid massive credit-market losses, he had lost the support of a longtime backer, Saudi Prince Alwaleed bin Talal, described similarly as a passive investor in Citigroup.

China made its biggest overseas foray to date in October when its biggest bank, Industrial & Commercial Bank of China Ltd., announced the purchase of a $5.6 billion stake in Africa's largest lender, South Africa's Standard Bank Group Ltd.

China has the money to spend because of its ballooning trade surplus with the rest of the world, as well as a local stock-market boom that has raised tens of billions of dollars for giant state-owned firms. China's foreign reserves rank as the world's largest at more than $1.4 trillion.

The terms of the Morgan Stanley deal guarantee CIC a 9% annual return, well above the fund's 5% cost of funding until it converts its investment to shares in 2010.

For Morgan Stanley, the deal could offer it some measure of goodwill in a country that has remained elusive to Wall Street.

In the 1990s, Morgan Stanley formed the first onshore investment-banking joint venture, China International Capital Corp., with a Chinese state bank. That venture later suffered from disagreements between the two partners, and Morgan Stanley became a passive investor, still holding a 34% stake.

[chart]Reaching out to Chinese money is a natural move for Morgan Chairman and Chief Executive John Mack, perhaps the top U.S. financial executive left with deep ties to China.

Since returning to Morgan Stanley from Credit Suisse in the summer of 2005, Mr. Mack has pushed his China team to build a broader platform in China. He recently signed a deal to re-enter the Chinese domestic markets, while Morgan Stanley has also bought a small Chinese bank and a stake in a fund-management venture.

All of those deals beef up the bank's China presence at a time when Morgan Stanley, like most of its rivals, still does most of its China business out of Hong Kong by linking Chinese companies to global capital markets.

Still, striking deals in China has become increasingly difficult, as Beijing fears some Chinese assets have gone to foreign investors too cheaply in the past. Skyrocketing stock prices have contributed to this feeling and prompted regulators to scuttle deals by Western firms.

Though China continues to attract the world's highest levels of foreign direct investment -- $61.68 billion in the first 11 months of this year, an increase of 14% on the year -- the size of the biggest outbound investment deals have this year far exceeded inbound investments.

The top five outbound investments from China were for an average of $3.1 billion, according to Thomson Financial, while the top inbound deals were for an average of $202 million.

Write to Rick Carew at rick.carew@wsj.com, Laura Santini at laura.santini@wsj.com and James T. Areddy at james.areddy@wsj.com

Wednesday, December 19, 2007

Went skiing for a couple of days and -bam- returned to some pretty major development. First, as expected, Xi Jinping, an increasingly likely successor to Hu Jintao, takes over as the president of the Central Party School, replacing Zeng Qinghong. The piece below is correct in stating that Xi needs also to secure the state vice presidency and more importantly the vice chairmanship of the Central Military Commission to complete his preparation to succeed. We will see if Li receives any of those slots instead. It would be interesting if Li Keqiang becomes the vice president of China. We will then see an official competition being played out.

The second news is frankly very surprising to me. China Investment Corps, which invests 200 billion of China's foreign exchange reserve, decided to plop down 5 billion to bail out Morgan Stanley. Here, I offer a few possible explanations, although I personally would like to know the full story.

1. Granted MS has a long history with China as it was the first foreign investment bank to start an investment bank joint-venture with China. This is also important because the head of CICC (the joint venture child) is now Zhu Yunlai (Levin), the son of former premier Zhu Rongji. Of course, Zhu the elder is known for his caution when it comes to the forex reserve. If through the Zhu Yunlai connection, MS is able to persuade elder Zhu to not oppose the deal, it would have made the deal sail through more easily.

2. I don't think in this case the main lobbying force came from Lou Jiwei, who is already in enough trouble from the Blackstone deal, which has thus far resulted in hundreds of millions of book loss for CIC. He would have wanted some safety guarantee from someone higher up. My guess--and this is a pure guess-- is that Wu Yi also stepped up to lobby for MS, and Premier Wen, who tends to be pretty cautious, decided to give her "face" by approving the deal. We can see this as a retirement present for Wu Yi. I don't think this deal involved any of the new vice premier candidates like Wang Qishan or Zhang Dejiang. Although Wang also has connection with MS as the former head of CICC, he wouldn't have wanted to take such a big risk early in his stint as vice premier (well, even before he becomes one actually).

Anyway, the above is pure speculations. I urge my esteemed colleagues in the reporting business to find out the real story. I think whatever it is, it is bound to be very interesting.

The Straits Times December 19, 2007 Wednesday, by Chua Chin Hon

Xi Jinping consolidates his position at the top;Sixth-ranked Chinese leader takes over elite party school

BEIJING - CHINA'S sixth-ranked leader Xi Jinping has taken over leadership of the elite Central Party School (CPS), consolidating his position as the front runner for the country's top leadership in 2012, sources say. Equally significant, his appointment quashes speculation that President Hu President Hu -Search using:

Jintao's top protege Li Keqiang would get the job at the CPS - a development that would have injected unpredictability into the leadership race.

Both Mr Xi, 54, and Mr Li, 52, were catapulted into the ruling Chinese Communist Party's (CCP) top decision-making body in late October following a major leadership reshuffle.

Mr Li became China's seventh-ranked leader.

While Mr Xi is seen as the front runner for the top job, political observers say his position as the heir apparent cannot be considered secure until he successfully acquires three coveted appointments. The presidency of the CPS is one such appointment. The school trains future leaders and is seen as an influential place to build connections with promising provincial officials and younger military commanders. The two other coveted appointments are those of the state vice-presidency and the vice-chairmanship of the powerful Central Military Commission - the Chinese military's top decision-making body.

Mr Xi's position as the front runner would come under doubt if he loses any of the three appointments to Mr Li, who has a close personal relationship with Mr Hu going back to the 1980s. Thus far, Beijing has not officially announced Mr Xi's appointment at the CPS though the news has been indirectly confirmed by state media reports this week. The official Xinhua news agency said that the rising star presided over a major symposium at the school on Monday, during which Mr Hu delivered a keynote address.

Conspicuously missing from the event was outgoing Vice-President Zeng Qinghong, who has been the CPS president since late 2002. The influential Mr Zeng, 68, will officially retire in March next year and all eyes are on whether Mr Xi would replace him as the next vice-president. Traditionally, the vice- presidency has little real clout in China. But this portfolio has become important in recent years as it allows those aspiring to top leadership to gain foreign policy-related experience.

In this regard, Mr Xi appears to have a slight edge over Mr Li yet again. Since their concurrent elevation to the CCP's elite inner-circle, Mr Xi has been the first to receive visiting foreign dignitaries. He has met foreign guests, including Singapore's Minister Mentor Lee Kuan Yew, senior leaders from Japan's ruling Liberal Democratic Party as well as former United States president Jimmy Carter.

In contrast, Mr Li has so far, according to state media reports, met only one foreign guest in Beijing - European Commission president Jose Manuel Barroso, who was in town for the recent China-EU Summit.

Morgan Stanley secures $5bn from China

By Philip Aldrick, Banking EditorLast Updated: 3:50pm GMT 19/12/2007

Morgan Stanley has become the latest global investment bank to resort to a foreign state bail-out after the Wall Street giant revealed its sub-prime related losses had ballooned to $9.4bn.

In a further sign of the shift in power to the Far East and Middle East, China's sovereign wealth fund - China Investment Corp (CIC) - is injecting $5bn to shore up the Wall Street giant's capital position in return for equity units that will convert into as much as 9.9pc of Morgan Stanley stock.Morgan Stanley joins a growing list of banks that have sought help from cash-rich developing economies to stem their escalating sub-prime problems.

Earlier this year China Development Bank and Temasek, another Singapore state investment fund, became major investors in Barclays as part of a deal that would have seen them put up large amounts of cash had the British bank succeeded with its takeover for Dutch rival ABN Amro.

CIC, which has roughly $200bn in assets, also took a 3pc stake in Blackstone as part of the US private equity group's initial public offering in July.

Morgan Stanley's worsening sub-prime position caused it to post a $3.59bn net fourth quarter loss. Its mortgage related writedowns have shot up from the $3.7bn announced last month and include $7.8bn in sub-prime related writedowns.

John Mack, chairman and chief executive, said accountability rests with him and that he will forego his 2007 bonus. He added: "The writedown Morgan Stanley took this quarter is deeply disappointing -to me, to our colleagues, to our board and to our shareholders.

"Across the firm, we have moved aggressively to make the necessary changes, and these isolated losses by a small trading team in one part of the firm should not overshadow the momentum we see in virtually all of our other businesses."

The increase in the level of sub-prime writedowns comes after UBS more than tripled its provision to $14.4bn earlier this month. Analysts expect Merrill Lynch and Citigroup to follow suit and reveal deeper losses than those already revealed.

Thursday, December 13, 2007

Ouch, fresh off the press, new party secretary of Wang Yang is showing that he will resolutely crackdown on loose implementation of real estate regulations. Some 14 officials from Kaiping and Heshan in Guangdong have been reprimanded for acting against regulations. Granted, the investigation was carried out by the State Council teams that are going around the country inspecting land approval. However, the old secretary Zhang Dejiang would have found numerous ways to slow the investigation, and he definitely would not have made so many cases public in one go. Well, Wang Yang is gunning for the premiership or some such, so he is showing Wen what he is capable of...

Tuesday, December 11, 2007

Okay, I am sorry, but pictures of Jiang keep showing up. I just can't help it, so here is the latest installment of Dage Jiang (from chinadigitaltimes.net), probably on the Bund in Shanghai. Bloggers have noticed his brownish, redish dye job, which was also apparent in the previous photos. Again, we are joyous that he has such vitality even after retirement.

Sunday, December 09, 2007

Unlucky Meng...

Well, luck plays a part in Chinese politics, just as it does in other aspects of life. Recall that Hu loyalist Meng Xuenong was the unlucky mayor of Beijing who had to take the blame for not responding faster to the SARS crisis, even though his slow response was a direct consequence of high level infighting between Jiang and Hu and also constraints placed on him by Liu Qi, the party secretary of Beijing. Well, four years later, he finally got his break and was appointed governor (acting) of Shanxi Province. This was going to be his political come-back. But well, Shanxi has many mines, and one of them decided to explode last week, killing 105 people. Immediately, the central government dispatched production safety chief Li Yizhong to Shanxi, and Meng made a self-criticism. Thus far, he is holding on to his job, and I think this time he has the political savvy to turn a disaster into an opportunity. He has already announced a series of policies to compensate the victims ("no one else is to die!") and to prevent other accidents from happening. He also made the mayor of Linfen, where the accident occurred, stand up in front of Li Yizhong to make a self-criticism...I think he is learning--past the buck if there is a problem!

Wednesday, December 05, 2007

Dear MSS agent monitoring my blog, the above pictures are purely for fun. Former President Jiang remains a steadfast and healthy comrade in his advanced age, and we wish him many more years of vitality :)

Saturday, December 01, 2007

Well, the Guo Jinlong appointment was apparently just a preamble to a large-scale reshuffling. The Wang Yang, Bo Xilai, and Yu Zhengsheng appointments were predicted by a Joe Kahn article in the NYT on 10/13/2007 (see blog archive).

Zhang Dejiang-- no longer the party secretary(PS) of Guangdong...NPC?Wang Yang-- new party secretary of Guangdong, no longer PS of ChongqingBo Xilai-- PS of Chongqing, no longer minister of commerce (too bad, he was quite dashing in that job)Chen Deming-- Minister of Commerce, no longer vice chair of NDRCWang Jinshan--PS of Anhui, currently both governor and PS of AnhuiLiu Qibao--PS of Sichuan, no longer Guangxi PSDu Qinglin--no longer PS of Sichuan, awaits new positionSu Rong--PS of Jiangxi, no longer vice president of the central party school

Another side item, but my wife found a recording of our all-time favorite Chinese band Wood Pushing Melon (木推瓜) on youtube. Technology is amazing. What's more I also found an account of its show. We used to catch them at this divy place at Wudaokou. It truly is the greatest Chinese band ever. It's too bad that the band dissolved after the arrest and after the lead-singer decided to go to Tibet in 2002. The last time I saw them, the police showed up and arrested them after they cursed the CCP and President Jiang. For listeners, the song "Do Suo Do" begins in a funky way, but keep listening; it makes an amazing transition. Anyway, the link to the song is above, and the article in both Chinese and google translate English below.

雷子: "wood pushed melon" to the point memoriesHttp://ent.sina.com.cn at 23:07 on June 26, 2004 Netizen contributions

....Then I heard my friend said Yin Li-chuan is the Beijing underground rock group "wood pushed melon" frontman SONG Yu Zhe's girlfriend, of course, I can not determine what is true friends. Only "wood pushed melon" I was more familiar with, they are my favorite band several Beijing in a underground.

I have read several times their performance impressive is 2001 a night in Beijing Language and Culture University near the "Kiddie's" looking at that. At that time, "Kiddie's" every weekend night some underground band performances.

In 2002 the summer I go there, there was not that the performances. "Wood pushed melon," said the dissolution of the last year, SONG Yu Zhe, unaccompanied went to Tibet.

That is not the "wood pushed melon" special, a sense that they are not the most is the color of night band. Another night of the band "beautiful, pharmacy," some of which is a "horrified" acts performing arts: lead singer HE-wearing only underwear appeared on the triangular stage, he first will be a像章the pin刺进his arm on the flesh way.

While像章other good, HE Guo-feng took off his shorts and public urination. His urine has quite long time, estimates for the performance hold for a long time. Then a guy holding a 640 ML-equipment Yanjing beer bottles, then lead singer squatted where the urine, and then began to drink,边喝边loudly chanting: "good bottle of wine! Good bottle of wine!."

After nude This is the HE-jumped an arena will be ready for a piece of white cloth shop on the ground, then squatted That began publicly white stool. At that time, we must recognize some of the flavor of diffuse people sick, and some ladies were also made花容fade, do not know that time is also Yin Lichuan ladies from the group between.

HE peak in the stool after the end of the beginning That cloth, stirring in their droppings, he demonstrated their excretion power, it seems that he is in the paint. He then rise into the audience said the auction site works now, some people shouted: "I am a 50 fen!", "Me from the two hair!", "I developed a hair!", "Me from the fifth!", "I a one! "...

My night "Kiddie's" full of sympathy for the security, because the final of this artistic work is being disposed of them.

Actually night, "Wood pushed melon," the band's frontman SONG Yu Zhe also engaging in some act of performing arts, but with just said that compared to the smell and visual may not have such a big impact.

SONG Yu Zhe night that the songs that made them the first few "Tito" were familiar masterpiece. He again ferocious着脸singing the first "哆嗦pyridoxine", in which once again with his piercing voice will be distorted children's songs "Wahaha" sing撕心裂肺, Garden in his voice again in a the slaughterhouse, and the flower gardens are blooming again fleer the wind ...

They also perform a night that the first "The Birth of Tragedy", the name and Nietzsche's no doubt that the works of the same name. When this song on the half performances, an estimated 200多斤long hair Agency spokesman appeared on the stage, beginning with a belt strap is Taking personal charge sang the SONG Yu Zhe, it should be said that beating a special relentless, and the two pumping 30, as whip. When SONG Yu Zhe turned around, we can see that after he traces back crisscross whip, his back had been bruised and lacerated blood throughout the hill, and SONG Yu Zhe this concert has become a mournful and shrill cries.

I do not know that time is not SONG Yu Yin Lichuan Zhe's girlfriend. If so, the estimated she performed in the night, after the expiry SONG Yu Zhe the back painted red syrup now ... of course they said already劳燕分飞. (雷子)